Personal Finance

Without even knowing you, I’d be willing to bet that most, if not all, of the New Year’s resolutions you made at the beginning of the year didn’t materialise. There’s no point agonising over that – it’s what happens to most people. But you can do something about it. At any given moment, you have a choice. A choice to do better. A choice to change.

Growing up financially involves breaking old unwanted habits and cultivating new and effective ones instead. The flaw in our thinking is that most often when we think about wealth, we think about it in terms of money. People who earn a substantial amount of money are considered wealthy in our society.

What we tend to overlook is that most people are dependent on their job alone for their high income, a job from which they might be fired, only to be left with mounting bills and growing debt. Real wealth is created from assets that generate regular positive cash-flow.

The best place to start is to put together a financial plan, or if you already have one, drag it out of the bottom drawer and get to work on updating the numbers to fit your current situation. There’s no quick fix but building wealth can be done. It just takes time and effort. Planning your finances means you can start to get ahead. A financial plan also helps you to manage life events such as buying a home, having kids, paying for education, or planning for retirement, without having to sacrifice the future that you want.

The right financial plan can help you minimise the bad, make the most of the good times and protect against the unexpected. The idea is to create a road map for the year ahead—not a rigid daily schedule, but an overall outline of what matters to you and what you hope to achieve in the next year.

In the beginning of the year there was doubt

To begin the process, ask yourself two questions and try to come up with at least six to eight answers to each:

What went well this year?

What did not go well this year?

For these answers, you should be mostly interested in events that you had control over. If something did not go well that you couldn’t prevent or control, it doesn’t need to go on the list. It’s also important to remember that all answers should be – S.M.A.R.T – Specific M – Measurable A – Achievable R – Realistic T – Time Targeted.

I like completing this list before doing any future planning. I’ve said before that we tend to overestimate what we can do in an average day but underestimate what can be done over the course of a year. Looking at a whole year in review, you may be surprised at everything you’ve accomplished. And next year, if you take this goal-setting process seriously, you may be even more surprised with how much you’ve done over the year.

The three commandments

Income – Has it been growing or falling? Putting a target income figure down on paper that you wish to achieve in the year ahead will focus your mind and allow you to consider what steps and actions you need to put in place now to reach your income target.

Savings – What is your current level of savings and how is it structured? Savings should be primarily focused on emergency savings for immediate use during unexpected events. Target a savings amount equivalent to three to six months salary. Remember that capital growth is secondary to capital protection. Vehicles such as a money-market or fixed deposit accounts are ideal for savings.

Retirement investing – How much progress did you make on this in the last year? Or was it another year in the trenches with little time spent planning for your inevitable retirement? Assuming you have some form of pension/retirement plan in place, during the next 12 months you’ll need to understand items such as:

How has my retirement fund behaved in the last year? Have I lost money or made money?

Do I know what type of investment funds I am invested in? Are they subject to a high degree of volatility?

How have changes in my personal or business circumstances been catered for within my retirement plan?

Am I setting plans in place now to ensure that I maximise on the tax benefits possible from my retirement investment?

Or do nothing. The time will pass either way. It truly is up to you.

In conclusion, things to keep in mind while setting financial goals include:

the time horizon—meaning how much time you want to take to achieve your goals;

the amount of money you plan to start with;

the amount of money you’ll need to contribute each month; and

how these goals may fit in with your risk tolerance as an investor.

Working with an advisor who provides access to solutions, tools, research, and guidance may help increase your confidence in meeting goals. An advisor should help you develop a plan that defines a strategy, timeline, and potential solutions that can help you pursue these objectives. But some people prefer to plan these things themselves. So be it, we still live in a democracy.

Having both personal and financial goals can help you plot a path to the future and can give you the motivation you need to sacrifice now to help make your ultimate dreams a bit more achievable.

“Discipline is choosing between what you want now, and what you want most,” Abraham Lincoln, the 16th president of the US famously said.

From the perspective of a young investor, one might ask: “Are you spending your money on ‘things’ or are you ‘paying yourself first?’”

Psychologists tells us that younger people find it difficult to visualise themselves as 65-year-olds, and won’t easily make trade-offs where they sacrifice enjoyment now so they will have capital later in life. Yet they should – and one of the best ways to make a small sacrifice now for a big benefit later is to use a ‘free deal’ from the taxman.

It involves contributing to a retirement fund, and re-investing the tax saving you get back from the South African Revenue Service (Sars) in a retirement annuity.

One of the main criticisms of retirement annuities (RAs) is that you will eventually have to pay tax on the money saved in the RA. If you invest more than R1 000 a month into an RA now and increase the contributions yearly with inflation for 35 years, this will probably be the case.

When you invest in an RA, you are deferring tax (which is really a good thing), but it doesn’t necessarily mean you are never going to pay tax. The benefit of deferring tax is that you give your capital more time to grow so that the tax is effectively paid by capital growth.

Investing the tax saving on your retirement fund contributions in an RA is one option, but you could also consider a combined plan where you invest in a tax-free savings investment or a flexible investment.

If you were to invest the tax saving from Sars into an investment vehicle such as a tax-free savings investment, it allows you to build up an amount which you will be able to access as additional tax-free income when you are older.

By structuring your investments optimally over a 35-year period (if Sars increases all the yearly deductions that individuals receive with inflation), you should be able to receive a monthly income of R25 311 in today’s purchasing-power terms that is tax-free.

Two scenarios

Let’s consider two scenarios – one where you don’t re-invest the tax saving, and one where you do.

In both instances, you start by putting R4 500 a month into a retirement annuity, and in both instances you want to draw the equivalent of R20 000 a month in today’s terms from age 65 onwards (increasing each year in line with inflation).

With the second scenario, we deduct 5% per month (effective tax rate on non-retirement income; for assumed interest tax and possible capital gains tax) but – importantly – save an additional amount each month by re-investing the tax saving from Sars into a flexible investment. To keep things simple, I have not increased the living expenses by the amount not saved per year in the first scenario.

Annual income projection from age 65, available versus required

Scenario 1

Where you don’t re-invest the tax saving from Sars on your retirement fund contributions – by age 84, the income required will exceed the amount the investments will be able to provide:

Scenario 2

Where you do re-invest the tax saving from Sars on your retirement fund contributions – taking our assumptions into account, the income provided should last to age 99:

Graphs done on the Elite Wealth System

The difference that effective and tax-efficient saving can make to your life is astounding. You can effectively increase the life of your money by 15 years. All it takes is some discipline.

Many people make financial decisions they believe are helping them save, but are doing the exact opposite. Fin24 spoke to Sam Beckbessinger, author of ‘How to manage your money like a f***ing grownup’, about the biggest mistakes you could be making.

1. Over-insuring

Few South Africans understand how to best use insurance, Beckbessinger says. Don’t insure every little thing, she advises. Rather focus on insuring “the things that could bankrupt you” if you lost them – like your home, or your ability to earn a living. Many people are under-insured for disability or illness, but worry overmuch about the small things. “Breaking your cellphone is not the end of the world,” she says. “Rather put that money into savings and worry about what you’d do if you couldn’t work.”

2. Not being afraid enough of debt

“Debt traps you in the past,” Beckbessinger says. Her book, How to manage your money like a f***ing grownup, focuses on the mental blocks holding people back from financial success. Debt is one of these – and according to a 2014/15 World Bank Report, South Africans are the world’s biggest borrowers. More than half of South Africans are three months or more behind in their debt repayments. If you are in debt, focus all your energy on getting out, says Beckbessinger.

3. Not understanding inflation

“Inflation is the enemy of savings,” she explains. If your investment is not growing at a rate that beats inflation, over time, that money is worth less and less.

4. Thinking ‘this is future me’s problem’

Time really does matter, says Beckbessinger. There will always be a reason to put off managing your money – but the earlier you start, the more money in your pocket. Someone who saves R1 000 a month starting at age 25 can end up R1m richer than someone who starts at 30, she says – and thanks to compound interest, starting to save for your retirement in your 20s can make a lifetime’s difference.

5. Having savings and debts at the same time

Money is fungible, Beckbessinger explains, which in plain English means a rand is a rand. But because humans have feelings, we attach meanings to different types of money. “So we like to keep money in savings accounts because it makes us feel good, and we don’t use our savings to pay our debts because that makes us feel bad,” she says. However, if for instance you have invested in a fixed deposit account at a 6.6% interest rate, but your credit card debt is charged at 20%, you are losing money.

6. Not knowing who to ask for help

Get good advice from an objective advisor, she says, and don’t be afraid to pay for it. “Don’t get your advice from someone who is selling you something. If the advice is free, you’ll pay in another way.”

7. Relying too heavily on property investment

There’s nothing wrong with buying property, but it’s not the only way to invest and it’s not necessarily right for everyone. “You don’t have to put all your eggs in one basket,” she says. If you don’t have the means for a diverse investment portfolio that includes property, you can buy shares online quickly and easily (she uses www.easyequities.co.za) and start investing for less than the price of dinner and a movie.

Beckbessinger has four failsafe rules for managing her own finances:

1. ‘Deal with the feels’

Be honest with yourself. Money is an emotional subject, so deal with anything that’s holding you back.

2. Pay yourself first

Use stop orders to deal with savings and debt repayments before you do anything else. Don’t expect to have willpower for budgeting at the end of the month. “That’s unrealistic,” she says. “We’re just primates with pants on!”

3. Have one clear goal at any time

This helps you maintain focus. Are you saving for a car? A trip? Your studies? A home? Always have a financial goal.

4. Open a second account

Beckbessinger has two accounts: one for bills and one for fun. That way, she never overspends.

‘Manage your money like a f***ing grownup’ is published by Jonathan Ball.

Buying your own home is important. It provides a place to live and a form of security. But you cannot rely on appreciation in house prices to fund a comfortable retirement. Data on household wealth accumulation over the past eight years shows that the best strategy for growing wealth is to hold a diversified portfolio with a weighting towards financial assets like shares or bonds, rather than property.

Household wealth is influenced by three factors. The first, is that a surge in debt can quickly undermine the net worth of any household, especially if the debt is being used to fund consumer spending rather than buying an asset such as a vehicle or residential property.

The second component is growth in the value of financial assets such as unit trusts, direct holding of shares, pension funds, retirement annuities or a bank deposit. Their appreciation is largely determined by the level of interest rates or the performance of the stock market. Stock markets can be volatile over short periods, but they mostly perform exceptionally well over the longer term.

The final component is growth in non-financial assets. These include mainly residential properties, but also vehicles and other durable goods. Over time this category has been expanded to include a wider range of assets, such as art and other collectable items.

In 2017 SA’s householders were richer than ever before, with a net worth (after debt) of more than R10tn. That is partly because, after the financial crisis of 2008, household debt, particularly mortgages, rose slower than in the borrowing spree of 2005/06. Now it is quite manageable.

Household mortgage debt, measured in rands, increased by an annual average of only 3.7% over the past 10 years, which is well below the rate of housing inflation.

Apart from lower debt, South African householders also gained from the appreciation in their financial assets, which has far outstripped growth in physical assets. Over the past eight years growth in financial assets, including equities, money market and income funds, has averaged 9.7% a year. By comparison, physical property has appreciated by an average of 6.8% a year and inflation was 5.6%.

Kathryn spent years drowning in debt and as a result, she was blacklisted for eight years with no access to finance or credit. On a mission to clear her name, Kathryn dedicated herself to getting to grip with her finances and learning the do’s and don’ts.

Kathryn says that during her battle of being black listed, she paid off all her debt diligently over a four-year period (half the time that it took to make it). “I made a commitment to each creditor and paid as per my agreement. When I had extra disposable income it all went straight into paying off my debt” she says.

On her journey, she was amazed to see how many people were too going through the same thing. “In South Africa, there are more people with debt than with jobs. Our out of control spending habits and the ‘buy now, pay later’ habits have spiralled out of control,”

Realising that parents are the biggest influencers on kids and that these bad habits had been passed on through the generations, Kathryn made it her mission to not only educate herself, but to start engaging on the importance of teaching financial literacy to kids and speaking openly about finances in the household.

With a firm belief in the difference that raising money savvy kids could make, what started off as a passion project has evolved into a business and today MSK partners with various big corporates to develop custom financial literacy content – all developed by Kathryn’s full-service advertising agency, Main Multimedia.

Kathryn talks to some of the financial biggest lessons that she has learned as an entrepreneur:

Make sure to have a separate bank account for your VAT. SARS wants their money on time and if you don’t pay they take money out of your business bank account

Never empty the bank accounts. Debit orders and payments are always going off. Bouncing debits and payments gives you a poor financial credit score so getting finance when you need it becomes impossible

Don’t use your business account as your personal bank account. Pay yourself a salary and budget properly. Using business cash to supplement your over spending leaves less money for legit business expenses

Always use a book keeper to ask for money. Asking for money from clients’ ruins relationships

Make sure you are very clear about your credit terms with your customers.

After a long financial journey, Kathryn says that she does believe that banks are actively trying to be better for entrepreneurs. “I foresee a lot more support and understanding for our ventures in the next few years.”

Kathryn shares five financial tips for entrepreneurs in SA:

Keep an updated budget that you review and amend on a monthly basis. This way you always know the situation you are in and how much money you need to make to break even or make a profit

Always pay the tax man

Cash flow management is extremely important. Billing out quickly and money in on time is essential

The idea that you need to earn a large salary to accumulate wealth, is a popularly held misconception. “The stepping stones to making your first million are actually the foundation blocks for achieving financial freedom — something most of us are striving for,” explains Warren Ingram, financial planner and co-founder of Galileo Capital.

1. Developing better spending and saving habits

To build a lot of wealth and achieve a solid financial future, you’ll need to plan ahead and develop spending and saving habits. Here are a few good habits you should develop before you can build a lot of wealth starting from zero:

Habit 1: Settle your debt

“You cannot get rich if you have short term debts such as credit cards, clothing accounts and overdrafts,” explains Ingram. He continues to say that if you really want to become wealthy, you’ll need to pay off these bad types of debt as quickly as possible. After that you can keep your good debts such as home loan and car debt. Unless you’ve inherited a large amount of money, you will most likely need a loan to buy your first car or house. This isn’t a bad thing.

“Debt can be a wonderful tool for wealth creation if you’re using it to buy assets that will appreciate in value at good growth rate,” reveals Ingram.

Habit 2: Have emergency funds at hand

Once you’ve eliminated all of your bad debit, you should start building up a cash account that is accessible at short notice, for when disaster strikes. “Try to keep 3-6 months’ worth of your monthly expenses in this account. It’s not an investment and should only be used to pay for emergencies such as a car breakdown or insurance claim,” explains Ingram.

This account will enable you to still pay for emergencies without having to sell investments at the wrong time.

Habit 3: Start saving

The earlier you start saving the better, but even if you’ve left it until later in your life, you can still benefit from compound interest. The longer your savings has access to a good interest rate, the larger the final amount will be. Starting early enables you to accrue compound interest but starting right now can also impact your financial future.

“Few people in their 20s realise how drastic the impact will be of only starting to save in their 30s. Starting to save at age 35, as opposed to 25, can chop a massive 40% off an investor’s potential retirement benefits. In fact, our research has shown that your first 10 years of investing are even more important than your last 10 years,” explains Jeanette Marais, Director of Retail Distribution and Client Service at Allan Gray.

For example

If you saved R1 000 a month for 10 years (i.e. a total contribution of R120 000), then stopped contributing but continued to invest the money for 30 years, you’d achieve the same total as someone who started 10 years later by contributed R1 000 a month for 30 years (i.e. total contributions of R360 000).

“Younger people can invest all their savings in shares because they have the time to let these investments grow,” explains Ingram. However, if you’re starting to save later in life, you haven’t missed the boat, there is still time to accumulate savings. You’ll most likely need to save a larger amount every month, as well as choosing more aggressive investment options, but the faster you start saving the brighter your future will look.

“In your lifetime as an investor,” advises Ingram, “you’re going to see many stock market crashes and recoveries, your job is to simply keep saving through all of them. Ignore all the people and pundits who will try to scare you out of saving, just keep your head down and stick to the plan. Ideally you should save as much as possible in the beginning.”

Once you have these spending habits under control you can use the money you’re saving every month to invest in your future. Here are some investment options for you to choose from.

2. Investing your savings smartly

Now that you’ve reduced your debit and are saving money every month, you can take the next step to building wealth. There is a perception that investing requires large sums of money, but the reality is many investment accounts have very low minimum monthly contributions making it possible for almost everyone to start investing.

How to invest

To become an investor you’ll be using your money to acquire assets that offer the opportunity for profitable returns. For example:

Interest and dividends from savings or dividend-paying stocks and bonds

Cash flow from businesses or real estate

Appreciation of value from a stock portfolio, real estate or other assets.

Why you should diversify your investment

There are of course risks associated with any type of investment, but to mitigate this risk you can diversify your investment portfolio. If you invest all your savings into the shares of a single business, you could lose all your money should that business fold.

On the other hand, if you invested in a single bond in a handful of top performers and one of them declared bankruptcy, you wouldn’t be left with nothing.

Understanding asset allocation

Another type of diversification is to ensure you invest across multiple asset classes. This is because conditions that cause one asset class to do well often lead to another to have poor or average returns. Splitting your assets across classes will balance your portfolio.

Various factors influence how you decide on what percentage to invest in each asset class, including your risk tolerance and the amount of time you can invest for.

For example: Shares are considered the riskiest and cash-like investments the least risky. Keep in mind, that the greater the risk the greater the reward, so while shares come with the highest risk, they also have the potential for the greatest returns.

Bonds are less volatile in comparison, but they also help a more modest return, with cash-like investment carrying the smallest risk, but the lowest returns.

Case Study: If you wanted reasonable returns and are comfortable taking some risk, you could choose 80% in shares, 15% in bonds and 5% in cash. Alternatively, if you had a shorter time to invest in and wanted a safer option, you would be better off with a more conservative asset allocation with a smaller percentage invested in shares and more in bonds and cash.

Beating inflation with growth assets

It’s vital that your investments are constantly growing, to ensure they aren’t eroded by inflation. If you consider, at current inflation rates, the value of your money today could halve within 12 years. If your investments don’t at least keep up with inflation, you’ll be going backwards.

If you have 15 -20 years to grow your investments, a good option could be local and global equities. Equities is however the long game, short-term disruptions in the market can cause the share price to fluctuate. Ultimately, if you selected wisely, the share price will reflect the business’ growth in profits, which should be above inflation.

Taking the long-term view

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” – Warren Buffett.

If you’ve left starting an investment portfolio till later in life you can still retire with a healthy nest egg, but you will have a vastly different strategy to someone who has 20-40 years to grow their investment.

Investments typically do require a significantly length of time to develop and grow, which is why the faster you start one the faster your money will grow. “While investing for 150 years is not realistic, backing an investment fund for ten, 20 or even 30 years is practical, particularly if you are investing into a pension for retirement,” explains Nick Train, Lindsell Train Global Equity fund manager.

“Investors should find an investment fund with a strong track record, with a manager whose style they like, invest and then leave their money alone for at least five years.” The longer you invest your money for, the more wealth you’ll build.

“There’s no single way to invest your money that’s the “right” way,” explains Ingram. “There are plenty of ways to go about it. The bad news is that it can be difficult to decide which option you’re going to choose.”

There are some easy-to-understand options says Ingram that are low cost and will generate decent growth. A good starting point is to determine your investment goals, such as how long you have to save. The amount of time you have to save will determine which investment options are viable and which aren’t.

Here are a few of the asset classes that you can invest in:

1. Cash

Cash is a safe investment. It’s for those who don’t feel comfortable investing their money in anything else, or for those who need access to the money in a relatively short period of time. “It’s far wiser to invest your cash in a money-market or fixed-deposit account at a bank, as these are relatively safe investments,” explains Ingram.

“Make sure you ask lots of questions before signing any forms to start an investment at a bank. Some banks will get you to speak to a consultant or adviser, who will try to steer you into buying a unit trust or other products where they charge upfront commission.”

The main disadvantage to cash investments is the low overall return on investment, but if you’re looking to have a rainy-day fund or the security of being able to access your money relatively easily, then cash may be the investment option for you.

“With cash investments, you should also be especially cost conscious, as fees will eat into your returns,” advises Ingram. “Don’t make any investment where the bank charges fees for opening or adding to a money-market account. Most of the banks offer quick-access money-market accounts for which no fees are charged and that pay relatively high interest.”

The different types of cash investments

As mentioned above banks offer a variety of accounts, from the everyday savings account to call accounts, and money market accounts. You’ll need to determine which one works the best for you.

For example:

A savings account won’t earn more than four percent a year, which could be less than inflation resulting in you losing money every year.

A 6-month fixed deposit account will offer you a higher return compared to a 32-day flexi account as it’s invested longer. However, if you decide on the 32-day flexi account, you can have your money in just over a month, in case of emergencies.

“When markets are performing well the mantra is often ‘cash is trash’ as there are usually better returns to be had elsewhere,” says Glenn Silverman, Chief Investment Officer at Investment Solutions.

“However, when things go south there is nothing as beautiful as cash. It’s a much-maligned asset class but it provides wonderful optionality. It allows you to take advantage of a falling market by purchasing under-priced assets. If you’re fully invested and have no cash available, then you can’t take advantage of falling asset prices.”

2. Unit trusts

A unit trust pools the contributions from numerous investors, to invest in assets such as shares, bonds or property. This offers investors access to more elusive markets, while increasing your exposure to a range of assets, which are carefully selected and managed by an investment professional.

Investing in a unit trust allows you to save and increase your money with inflation. It also offers you the flexibility of withdrawing your money typically within 48 hours. On the other hand, the minimum required investment can range between R10 000 and R50 000, depending on the fund manager.

Returns can fluctuate anywhere between 6.75% and 8.12%, with charges of around 0.3% for each investment year.

The different types of unit trusts

Equity funds: These are the most common type of unit trust. It’s comprised of listed companies based on specific criteria determined by the mandate of the unit trust. For example: You can get equity fund unit trusts that only invest in specific sectors such as construction shares, or a specific type of share, such as large caps.

Balanced funds: This is a portfolio that has a mix of equities, fixed income securities and cash. These are preferred by investors who want to reduce the risk of investing in the major asset classes.

Fixed-Income funds: These unit trusts invest mainly in fixed-income products such as bonds and money market instruments. The aim of this fund is to provide you with a regular source of income. It’s a good option for retirees who need extra cash.

Index funds: This type of unit trust invests in businesses that closely match a specific index. For example, the industrial sector.

International equity funds: This unit trust focuses on offshore companies as opposed to local ones.

Money market funds: This type of fund invests in liquid, low risk money market instruments, such as treasury bills or certificates of deposit. It is an open-ended mutual fund that invests in short-term debt securities.

Real estate investment trusts (REITS): A REIT is a listed company or property unit that invests in immoveable property. This unit trust receives income from rental and pays it through to its investors. It buys, manages and operates the property.

Shariah funds: These are ethical unit trusts that invest into Shariah compliant investments. This excludes businesses involved in activities, products or services related to, for example, gambling and alcoholic beverages.

“If managing your own investments makes you a little nervous, unit trusts are a good option, or you can contact a professional financial adviser, advises Warren Ingram. “Just ensure she or he is properly qualified and accredited, and, if possible, find someone who charges by the hour, not by commission, on the investment products they sell you.”

He goes on to say that you can also invest in a money-market unit trust offered by an investment adviser, but ensure you’re not paying upfront fees. “It’s acceptable for an adviser to earn an annual fee from your unit trust (no more than 0.5% per year on money-market unit trusts), but only if the interest you earn after costs on the unit trust is as good or better than the rate offered by the bank,” advises Ingram.

3. Shares

If you’re looking at a long-term goal, then you can afford to be riskier with your investments. Instead of cash you should look at investing in shares.

“A share is the smallest unit of ownership in a company or unit trust. You can own shares in private companies, and companies that trade on the stock market,” explains Ingram.

Since there’s more risk with shares you can also expect three to four times more growth, which is why you need to invest this money for longer periods of time.

How you can invest in shares

There are several ways to invest in shares, such as:

Buy them directly through a stockbroker: This means that you own shares in a business that you selected yourself. “For people who are new to share investing, I generally recommend that they invest in large, well-known businesses that have been in existence for many years. These are sometimes called “blue-chip” shares,” explains Ingram.

Via an exchange-traded fund (ETF): If you have a smaller amount to invest, the cheapest and easiest way is through an ETF. Ingram explains that an ETF trades on the stock market like an ordinary share, but it consists of a basket of shares in various companies. This allows you to buy multiple underlying shares with one investment.

Through unit trusts

Through an endowment: You invest your money for a minimum of five years or longer. The money you take out when it matures is tax-free.

Through a retirement annuity: This “is basically a personal pension fund. You put away a certain amount of money each month, and when the fund matures at your retirement age, it will pay you out a monthly pension,” explains Ingram.

Even though investing in shares can seem out of reach for most, you can invest as little as R300 a month or with a R1 000 lump sum. However, you need to be aware that if you opt for the monthly option you could be charged an annual fee of up to 1%.

When buying shares, you should use your knowledge of the industry you’re in. For example, if you have worked in the manufacturing industry for many years, you might have good insights into that industry. You will still need to research the companies you’re looking at, as you need to be certain of what you’re buying.

4. Bonds

“Bonds are tradable debt instruments whereby a government, state-owned enterprise or corporate raises capital by selling bonds into the market,” explains Simon Brown is the founder and director of JustOneLap.com, independent trading company.

“These instruments have a maturity date and an interest rate (called a coupon). The maturity date will be determined by the issuers’ needs while the coupon rate will be determined by the perceived risk of the bonds, the ability of the issuer to pay the coupon and repay the principle.”

For example

You lend R1 000 to your friend. You agree that he will pay back the money after five years and will pay you 6% interest per annum. You will receive R60 a year in interest and at the end of five years, your R1 000.

If the bank savings rate is lower than the interest you’re charging, then you’re earning a high return. This is where the risk comes in, if the bank increases its interest rate to 7% then you’re losing 1% a year on your investment.

You can then sell the bond to a third person at a slightly discounted price of R950. This third person is still scoring because they’re now receiving R60 a year on only R950 (6.3%), plus he gets R1 000 at the end of five years.

On the other hand, if the reverse happens and the bank rate goes down to 4% you can sell your bond to a third person at R1 100. You’ll make an immediate R100, and the third party will be happy because he’s getting a return of 5.4%, which is better than he’d get at the bank.

Why you should invest in bonds

There are two ways to make money on bonds, namely:

On price: By trading them over the short term, for example, buying low and selling high.

On yield: This is more of a long-term investment.

Bonds are typically issued in large amounts such as R1 million making them inaccessible to most individual investors. However, institutional investors such as life assurance companies and retirement funds, use them extensively, which is why you’re probably indirectly investing in them.

“However, we have had a few local exchange-traded funds (ETFs) issued over local bonds, tracking government and inflation-linked government bonds,” reveals Brown.

“We’re now also seeing two new offshore bond ETFs coming to market. Ashburton has issued an ETF tracking the Citi World Government Bond Index (WGBI) which invests in fixed-rate, local currency, investment grade sovereign bonds from over 20 developed and emerging market countries.”

He continues by saying that South Africa is also getting a new Stanlib bond ETF tracking the “FTSE Group-of-7 (G7) Index”. This will focus on developed markets only while the former includes a small weighting of emerging-market bonds such as those belonging to South Africa.

5. Properties

Investing in property is often seen as a safe, less volatile choice as it requires a long-term approach. Although, this type of investment isn’t without risk, there could be a market or area dip, or an interest rate hike, but it’s still one of the best investment option as people always need a place to stay.

The different types of property investments

Primary property investment: This is the process of buying and owning your home. Numerous property buyers apply for a home loan to purchase their first home. Over time, your property should appreciate, which will put you in a favourable financial position.

Buy-to-let investment: This is when you purchase a property with the express intention of renting it out. To ensure ongoing profits you’ll need to determine the best area and type of property to buy, and potential tenants need to be thoroughly vetted. Once paid off the profit can increase significantly, and the property should also increase in value, putting you in a strong financial position.

Offshore buy-to-let investment: Investing in buy-to-let property offshore can effectively create a buffer against economic or socio-political headwinds. You can earn in a foreign, most likely stronger currency, and possibly even gain citizenship through incentive programmes. Be aware that you should employ a reliable and efficient offshore property management service to ensure the success of your property.

Listed property fund: Local and offshore listed property funds give investors access to the benefits of owning property without having to deal with a physical building. “It gives an individual the opportunity to invest in a range of properties through the purchase of stock. Property funds buy you a stake in real estate companies listed on the Johannesburg Stock Exchange (JSE) – saving you the headache of maintaining property and dealing with dodgy tenants,” explains Fayyaz Mottiar, Fund Manager of the Absa Property Equity Fund.

“For a small investor, a buy-to-let property comes with a concentration of risk. You are spending a huge amount of money on one single asset and if the tenant goes wrong, you take a big financial knock,” explains John Loos, household and property sector strategist at FNB Home Loans.

“Yes, the share market can be volatile, but if you bought into one listed property fund, you have already spread your risk into a number of properties, so the concentration risk isn’t nearly as much as with a buy-to-let property.”

“Accept that property is always a long-term investment with ups-and-downs. If you are out for a quick buck, you won’t find it in property.

“Set yourself the goal of building up a property portfolio which you’ll steadily expand. Don’t sell your investment property, even to buy another.

“Don’t rush this process. Avoid buying numerous highly bonded properties consecutively. Rather buy one, set it up nicely, before you move on to the next.

“Try to invest in both freehold and sectional title residential property, and small commercial and industrial units.

“Accept that your own home is part of your portfolio. Too often, as salaries increase, so does the desire for a bigger and better home, resulting in huge bond repayments having to be paid. Rather have a moderate home and save by having a small bond here and use the spare cash to buy elsewhere where you will earn rent.

“Property truly gives you the best of all worlds as you get to enjoy it while living there, enjoy rental income if you choose to let, the satisfaction knowing it’s yours, and only yours, once paid off, and of course the reward of knowing you have something to leave behind for your children someday,” says Craig Hutchison, CEO Engel & Völkers Southern Africa.

3. SA Financial Experts Tips For Investing

“Find a practice which is willing to invest in you now and partner with you for life. Every successful investor began their journey with one small investment,” explains Sue Torr, managing director at Crue Invest.

“The way that the prosperous continue to build their wealth isn’t really a secret – they spend less than they earn, save the difference, and let the potential of compound interest make their riches grow,” says Hutchison.

“UBS Wealth Management in Switzerland studied the difference in the wealth of people who are good planners versus those who are not,” explains Ingram. “It found that if you don’t budget and you don’t have investment and retirement plans, you are guaranteeing that you will limit your wealth over your lifetime. The report also shows that even a small amount of planning can make a massive difference.”

“Setting these goals is like setting the destination points on your GPS – you’ll save a lot of time and money by having a clear endpoint in mind instead of coasting around,” says George Herman, Director and Chief Investment Officer at Citadel Investment Services. “Be as specific as possible, thinking carefully about how much you will need and your timeframe.”

“People in their 20s don’t save or invest because they’re waiting to get a better job or start a business to earn more money, but the truth is most millennials spend 30-50% of their pay cheque on entertainment. It’s better to start putting a little aside when you have minimal responsibilities and take advantage of the power of compounding interest. You must find a balance between having fun and having funds. Sometimes It’s okay to miss out to stack up,” – Arese Ugwu, authorSmart Money Woman

“Every South African knows that Cape Town property growth will be more attractive than property yields in smaller towns up-country. So geographical location must be taken into account,” says Jan Vlok, a research and investment analyst at Glacier by Sanlam.

“It is a big mistake to borrow money to use for investing,” says Gusta Binikos, CEO of FNB Share Investing. “Investing is a long-term game, and nothing is certain, there is a chance that you can end up losing money and owing on your debt, leaving you in a very bad financial position.”

“As South Africans, we should think more globally,” says Jean Pierre Verster, a portfolio manager at Fairtree Capital. “We shouldn’t limit ourselves to stocks listed in SA only. The ease with which South Africans can now open brokerage accounts that allow for access to stock exchanges globally reinforces this.”

When you resign.

The decision to cash out retirement benefits when changing jobs is arguably the biggest contributor to many pensioners’ dire financial position.

International research suggests that millennials – the generation born between 1981 and 1996 – are most at risk since they tend to change jobs more often than previous generations and will need to overcome the urge to cash out their retirement benefits more frequently.

While there may be instances where it could make sense to cash out retirement benefits, it should be the last resort and it should only be done after carefully considering the long-term implications. Here are some things to ponder.

1. It becomes increasingly difficult to catch up

Although one may argue that at age 30 or 40 there is still a long way to go to retirement, and that you will catch up along the way, it becomes increasingly difficult to do so, due to the impact of compound interest.

Ronald King, head of public policy and regulatory affairs at PSG, says if someone starts planning and saving for retirement at age 20, the individual would need to save 12.5% of his salary. If he only starts at age 30 (because he cashed out), he would need to save 22.5%.

If the same person decides to cash out his benefits at age 40, he would need to save 42% of his salary to be in the same position at retirement, he adds.

Due to other financial commitments, most people would be unable to afford such a high contribution rate.

If someone takes his retirement benefits at age 50, and starts saving anew at that point, he would need to save almost his whole salary to maintain his living standard in retirement.

2. The tax implications of cashing out are significant

Since the regulator wants to encourage people to save for retirement, significant tax breaks are allowed for contributions to retirement vehicles. Not only can individuals claim a tax deduction of up to 27.5% of their total taxable income each year (capped at R350 000), all retirement assets are allowed to grow tax-free while inside a retirement vehicle (pension fund, provident fund or retirement annuity).

But if you cash out prior to retirement when changing jobs, the taxes are punitive.

King explains that only R25 000 of the retirement funds can be taken tax-free when changing jobs – the rest will be taxed according to a sliding scale (see table below).

Taxable Income (R)

Rate of Tax (R)

0 – 25 000

0% of taxable income

25 001 – 660 000

18% of taxable income above 25 000

660 001 – 990 000

114 300 + 27% of taxable income above 660 000

990 001 and above

203 400 + 36% of taxable income above 990 000

Source: Sars

Yet, the most significant tax impact will only become visible at retirement.

Retirement annuity and pension fund investors can take up to a third of their benefits as a cash lump sum at retirement. Provident fund members can (currently) take all their funds in cash at retirement. The first R500 000 will be tax-free.

King says the biggest problem is that those pension benefits taken as a cash-lump sum when resigning will be deducted from the amount that can be taken tax-free at retirement.

“If you take R500 000 during your lifetime when resigning, you won’t be entitled to the tax-free amount of R500 000 at retirement.”

This means that individuals can pay up to roughly R85 000 more in tax when they retire, because they cashed out when changing jobs, he adds.

3. You can now leave your pension benefits in your former employer’s fund

The introduction of default regulations for retirement funds means that funds need to offer in-fund preservation options for employees when they resign. Employees do not have to make use of it (they can opt out) but it may be an attractive option where funds offer good value for money and attractive returns.

King says most people would probably prefer not to leave their money with an employer with whom they no longer have any contact. The alternative is to transfer retirement benefits to a preservation fund or retirement annuity. The costs, underlying funds and tax benefits are the same.

The main difference is that in the case of a preservation fund, investors would be allowed to access the funds once before the age of 55. With a retirement annuity, funds can’t be accessed before this age.

King says to determine whether a preservation fund or retirement annuity will be the best choice, investors need to consider if they will be tempted to spend funds that are accessible to them.

“If there is a significant risk that you would want to use the funds to buy a new car or to improve your house, it would probably be best to transfer the funds to a retirement annuity.”

However, if you may need the funds in future because you don’t have any other income, the preservation fund will likely be your best bet, he says.

Consider this picture: A 43-year-old man – in seemingly perfect health – sits on a couch in his living room with his wife and daughter. “Gary can get R2 million in life cover and R1 million in disability cover for just R700 a month,” the advertisement reads.

Or this one: A provident fund member, highly upset about a government plan to enforce the compulsory annuitisation of two-thirds of his fund benefit at retirement instead of allowing him to take all the funds in cash at retirement.

There is something about a large sum of money that gets people much more excited than the idea of a steady monthly income.

So entrenched is this concept, that it is frequently cited in songs, game shows or literature. The “pot of gold at the end of the rainbow” and “Who wants to be a millionaire?” come to mind.

Why do investors favour a lump sum?

It may be because “wealth” is generally associated with a lot of assets or a large pool of money.

Unfortunately, most people struggle to manage a significant pot of money – particularly if they need to live off it for a long time.

As the former chief executive of a large asset manager succinctly puts it: “Most mere mortals are used to a monthly income. Large capital amounts get us all confused.”

Research it recently conducted suggests that if offered a choice of R1 million or a guaranteed income of R10 000 a month for the rest of their lives, most people will prefer R1 million, even though the second option is worth significantly more.

The preference for a lump sum may also be because financial planning has historically been done this way and that people prefer to have access to a large pot of money.

“But in reality, what we work for is a lifestyle and to protect that you need a regular stream of income,” he says.

The preference for lump sum benefits – in retirement and with regard to injury, illness or death – may also be related to a distrust of institutions.

People may argue that if the money is in their bank account, it is theirs to use as they see fit, but if a financial institution or government has to provide them with an income, their fortunes are in a third party’s hands.

Apart from the behavioural issues related to a lump sum and people’s tendency to spend a large part of their pot quite quickly, it can also be difficult to determine how much money someone would need to provide a continuous future income. Assuming Gary from the ad died soon, would R2 million be enough to settle his debts and still provide enough of an income to cover his family’s monthly living expenses?

And then there is also the inflationary impact to keep in mind…

Lump sum vs regular income

From a financial planning perspective, there has been a growing realisation that people’s greatest asset is their ability to earn an income throughout their lifetime.

While most defined contribution funds lack a clear income-goal focus for individual members, commentators are increasingly highlighting the need to focus on income instead of a pot of money during planning.

In a recent Moneyweb article, US Nobel Prize winner and retirement specialist Professor Robert Merton, argued that retirement funds should use an income measure to tell members how they were doing on their way to retirement, instead of just reporting what the current fund value (lump sum) is.

Merton said it was much easier for people to relate to an indication that if they currently earned R10 000 a month and continued saving for retirement the way they do, they would only get an estimated income of R2 000 a month in retirement after inflation was taken into account.

While there is value in receiving a lump sum – which could be used to settle debts or to pay for a wheelchair or home improvements or a funeral depending on the circumstances – it is of much less value if it will largely be depleted to pay for these expenses and there is no on-going future income stream.

It is perhaps time to question whether it is appropriate to place so much emphasis on saving towards a large pot of money at retirement or the importance of taking up a large lump sum death, critical illness or disability benefit.

While there is undoubtedly value in all of these lump sum benefits (people will surely be better off having a lump sum retirement or risk benefit than not having it), the value of a lump sum is significantly impeded if investors don’t also have the ability to earn a monthly income in line with their living standards. First, solve for income…

Which bodes the question: Should the focus not be shifting towards financial planning that ensures investors can replace their monthly income from today until the day they die (and thereafter if they have dependents) and that it can be adjusted in line with inflation instead of just targeting a seemingly large pot of money at some point in future?

Investors may just get to the end of the rainbow, only to realise the pot of gold will not be covering their expenses for long.

According to recent data from FNB, the average age of a South African home buyer has increased from 38 to 44 this year.

In an attempt to help first-time buyers enter the market sooner, Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, has broken down some of the steps you can take when saving for your first home.

“If you take a realistic look at the property market, you will discover that you will need a minimum of R100,000 to use as a deposit and to cover the transfer costs and various other expenses on an entry-level property,” he said.

While it is possible to take out a 100% access bond, he said is still advisable to have as close to this amount as possible saved to cover various ad-hoc expenses that come with purchasing property.

Having the money readily available will also increase your bargaining power when it comes to negotiating interest rates on your home loan, Goslett said.

“Realistically, first time buyers can expect to save for a period of around five years before they reach their R100,000 target. Any shorter than this, and the buyer will have to be putting away a huge chunk of their earnings each month.

“As it stands, to reach the targeted amount in five years, a buyer will need to save as much as R1,700 per month. In four years, this amount increases to R2,100; for three years, it climbs to R2,800; two years will see them putting R4,200 away monthly; and one year will force them to put aside a whopping R8,300 per month.”

“Depending on where you are in life, perhaps you foresee a time in the near future where your expenses lessen drastically, and you are able to save aggressively for a short period of time.

“For recent graduates who have just entered the job market, for example, it is entirely possible –not easy, but possible – to put R4,200 aside for two years while living at home and saving on the expense of renting elsewhere. However, for the most of us, even finding just R1,700 per month will take some doing,” he said.

He added that the first step is to find a financial institution that can help you reach your savings goals.

“It is better to put your monthly contribution into a tax free short-term investment that yields higher returns than a normal savings account at your bank.

“Chat to your financial advisor to find out what the best options are. In all likelihood, they will be able to find an investment for you that will allow you to put away less than R1,700 a month but still reach R100,000 by the end of five years.”

“The next step is to cut back on unnecessary expenses. Pay off your clothing and other store accounts and close them as soon as possible. According to the 2014-15 World Bank Report, credit facilities such as credit cards, overdrafts and store cards make up 65% of credit usage in South Africa.

“If you can cut back on this unnecessary spending, you could be putting that monthly repayment straight into savings,” Goslett said.

As a final piece of advice, Goslett suggests taking up a part-time job to earn extra cash to put into savings.

“Sometimes, it is simply not possible to scrape that R1,700 out of your existing salary. There are various part-time jobs a person can do to earn a little extra cash that won’t take up too much spare time,” he said.

“Tutoring pays roughly R200 for just two hours a week; freelance writing at the industry standard R2 per word pays R1,000 for one 500 word article; babysitting and weekend promotional work usually pays around R150 per hour – and these are just a few of the options that are readily available to anyone who has the necessary skills and time.”

“By the end of the five year saving period, you will be able to afford a lifelong asset that will offer financial security well into your retirement. At that point, those five years of discipline and sacrifice will look like time well-spent when you consider the overall picture of your life,” Goslett said.

South African consumer debt has reached more than R1.71 trillion, according to the Reserve Bank. In addition, a report by the World Bank has revealed that 25 million South African adults, out of 37 million, owe money to financial institutions or other corporate lenders such as shops that allow them to buy now and pay later. The combination of the recent Vat increase, the largest petrol price hike ever in South Africa and the escalation in luxury goods excise duty will make repaying debts all the more difficult.

Here are top tips on how to avoid falling into the five most common debt traps, along with ways for navigating back to safety if you are already ensnared.

Credit card debt

Easy bait for the financially uneducated consumer, banks often offer rewards such as holidays, cash back and vouchers to entice clients into the credit world. However, the National Credit Regulator claims that 58% of South African consumers are struggling to pay off their credit cards. Most credit card users start off with the very best intentions and try to repay their debt, but many end up paying a significant amount of interest simply to keep their heads above water.

Before you sign up for a credit card, look at what you can afford and limit your monthly spending to less than that amount. Pay back your debt in full each and every month and your credit card will become a useful financial tool for building a positive credit rating. If you have already fallen into this credit hole, lock up your credit card somewhere safe and pay off as much as you can afford until the debt is wiped out.

Store accounts

Stores offer massive discounts, special offers and vouchers to get people to sign up for and keep using their accounts. With back-to-school, Easter, seasonal changes, school dances and Christmas, pressure is constantly on consumers to shop more and just put it on account. With this in mind it’s easy to see why 76% of South Africans are in debt due to store cards, according to data from a local debt management firm.

Ask yourself whether the store card is necessary and, if it is, use it wisely and buy only essentials with it. Otherwise, cut it up and use cash or other instruments to stay within your budget and avoid the trap.

Payday loans

Cash-strapped South Africans are increasingly turning to payday loans as a quick solution for making ends meet if they run out of money before the end of the month, but unfortunately this noose starts tightening rapidly once the first deadline is missed. Interest mounts up and many consumers are forced to borrow to repay the interest, leaving the original debt unpaid and attracting even more interest.

This avenue should be carefully explored before applying. If you have already gone down this road, pay the debt back as quickly as possible.

New car loans

The shiny chrome and new leather smell of a new car appeals to many motorists to the extent that they forget about their budgets and commit themselves to rampant debt. Loan periods were extended recently so that consumers could repay a new car loan in up to 72 months. To ease the monthly burden on motorists even further, balloon payments were introduced. This allows for lower monthly payments, but the final monthly payment could be as much as a third of the total loan. This puts ownership out of reach for most people.

Let your brain trump your heart in this decision, which has long-term and extensive financial implications on take-home pay. Analyse your needs and meet them. Second-hand vehicles offer good value for money with good warranties. With reasonable kilometres on the clock and good record keeping, a five- to seven-year old vehicle will provide great durability.

Hire Purchase

Previously prevalent in the furniture and appliance industry, Hire Purchase (HP) is now a popular means for financing car purchases. The downside is that the interest rates on these contracts tend to be higher than the prime overdraft rate of interest. What’s more, as you are hiring the item until you have paid the full amount, failing to pay could result not only in the item being repossessed, but you losing all the money you have paid so far.

Try deferring your purchase until you have saved the money to pay in full for the item. If that isn’t possible, get a professional to review the draft HP agreement before you sign. You must also make sure that you can afford the repayments.

Before making potentially debt-inducing decisions, consumers should take some time to consider the long-term consequences. In addition, they should speak to a financial advisor who can help them make sound choices that will pay off in the long run.